UPSTART JUMPS MUNI-BOND WALL

When the Chicago Park District has sold bonds lately, it's employed two companies to rate the debt for investment safety.

Most finance experts would expect the two would be Standard & Poor's Corp. and Moody's Investors Service Inc., the New York firms that have long dominated the debt review business.

But the New York big boys have had to fight for the second spot at the Park District. First place has belonged to Fitch IBCA Inc., a lesser-known but hungry upstart that's busting its way into the suddenly not-so-clubby world of government finance.

Though Fitch, which has headquarters in both New York and London, clearly is still No. 3, it's making a run around the country. It claims that its marketshare of the uninsured government-bond rating business has climbed more than 40% in the past two years, to $52 billion from $36 billion.

Competitors whisper that Fitch is buying its way in with sweetheart bond ratings that are slightly higher than they should be. Fitch scoffs at the claim, saying it just works harder to find value.

The firm's muni move also is beginning to spill over to the corporate side -- a result of Fitch's December merger with International Bank Credit Assessment, a British company that specialized in rating bank debt.

"There's a significant growth in respect for their ratings," says Walter Knorr, the city of Chicago's chief financial officer. "They're aggressive on price, and competitive."

"The rating product now is a commodity. What Fitch has done is open the game up," says Bill Morris, senior vice-president and head of the Chicago office of Minneapolis-based Dougherty Summit Securities LLC, an underwriting and financial advisory firm that works for the Chicago Park District and other local governments.

S&P and Moody's are far from waving a white flag, but they recognize they're in a fight.

"To maintain a (client) relationship, we will do whatever it takes," declares Harry Zachem, vice-president and senior credit officer for Moody's, who covers Chicago and other local governments from New York. A Fitch rating "is a me-too rating," sniffs a Moody's spokeswoman.

Heading Fitch's drive here is Michael D. Belsky, 39, a former Northern Trust Co. bond official and part-time politician (Highland Park councilman). His and the company's goal: "To be the equal to S&P and Moody's, if not the rating agency of choice.

"I think we're turning the corner now," he adds.

Local governments and companies clearly are thrilled, because the competition allows them to play one firm against the other, yielding better prices and service -- and sometimes better ratings, too.

The state of Illinois retained Fitch last year, after suffering "a little disparity" between ratings on a bond issue -- A1 from Moody's and a higher AA from S&P -- says Kurt Kauffman, head of the debt management division of the Illinois Bureau of the Budget. "We felt we were deserving of a AA, and that adding another perspective could help our sale."

Fitch delivered a AA rating.

The state will keep using the other two companies, Mr. Kauffman says, because the cost is relatively minimal -- about $15,000 each on a $250-million bond issue. But Fitch stays, too: "They're up and coming."

The story is similar at the city. Mr. Knorr first used Fitch after it "appreciated the potential" of a financial turnaround of the long-troubled Chicago Skyway, and was more willing than the competition to consider a new revenue stream for airport bonds.

Initially, "I basically used them as leverage on the other two," Mr. Knorr says. But he adds that the market increasingly has raised its opinion of a Fitch rating.

Expanding in banking

On the corporate side, Fitch long has rated the debt of such major local companies as Sears, Roebuck and Co., Quaker Oats Co. and Tribune Co., but is expanding particularly in the banking sector, where it's reaping dividends from the new field of commercial-mortgage-backed securities. "Because Fitch was very aggressive in getting in and learning that business, they were able to capture marketshare," says Susan Steves, executive vice-president of Chicago's LaSalle National Bank, which dominates the $60-billion-a-year field.

At the University of Chicago, which is said to be dissatisfied with Moody's, "The availability of a third provider will increase competition, and that will help ensure competitive rates," says Chief Financial Officer Patricia Woodworth.

Fitch's Mr. Belsky flatly denies that the firm has bought business by lowering its ratings standards. "We don't do that." Rather, because the company tries harder than its competitors to keep higher-paid veterans on its staff, it can employ "more cutting-edge" techniques that sometimes result in better ratings, he says.

Studies by the Federal Reserve Bank of New York and others have found that Fitch's ratings are somewhat higher than Moody's and S&P's.

Mr. Belsky pegs the start of the firm's turnaround to 1989, when Fitch was purchased by an investment group that included Robert Van Kampen, of the suburban Chicago mutual fund and real estate family.

Mr. Belsky says Fitch has profited by keeping good staff, beefing up research, targeting every sector of the investment community for a sales pitch and, unlike Moody's, dropping the New York perspective and opening regional offices.

As managing director of Fitch, Mr. Belsky runs the three-person Chicago office -- two staffers are slated to be added later this year -- and supervises facilities in Tampa, Fla.; Dallas; San Francisco, and New York.

Competition stirs

Despite the gains, Fitch is not yet a peer of Moody's and S&P. Though its marketshare has skyrocketed, it started from a low level and has failed to crack Moody's strong base among small governments, which often use only one rating company. Last year, Fitch says it rated 17% of such debt, accounting for 58% of total dollar value.

The competition definitely is stirring, however.

S&P opened its own Chicago office in 1994, and it now has 11 staffers, says Managing Director Sarah Eubanks. "S&P is the market leader" and actually has gained share in the Midwest in recent years, she says.